Qualcomm takes hit from legal setbacks

Street stays bullish despite losses in dispute with Broadcom

By

DanGallagher

SAN FRANCISCO (MarketWatch) -- Qualcomm Inc. shares lost ground Tuesday, retreating as investors reacted to the company suffering a pair of setbacks in its long-running legal battle with rival chipmaker Broadcom Inc.

For the moment, however, Wall Street appears to be maintaining its overwhelmingly bullish stance on the company
QCOM, -0.77%
which makes chips used in wireless phones.

"We believe legal-related announcements are likely to cause volatility in the stock (both positive/negative)," UBS analyst Maynard Um wrote in a report Tuesday. "However, given our belief that ultimate resolution of litigation is likely and 3G should start to ramp, we would view weakness as an opportunity."

Um rates the stock as a buy with a $54 price target on the shares.

Of 32 analysts covering Qualcomm, 25 currently maintain buy ratings on the shares, despite the company's legal battles aimed at maintaining a lucrative royalty stream from patents covering technology that's being used in many of the next-generation networks that wireless carriers are constructing.

Shares of Qualcomm gave up more than 4% to trade at $39.97 by midday -- their lowest point in nearly five months -- before staging a partial recovery.

Qualcomm's stock has slipped nearly 15% since peaking late in May. The shares began to slip after a federal jury in Qualcomm's hometown of San Diego found that the company infringed on three patents held by Broadcom
BRCMSee full story.

In the latest development, the judge overseeing the case ruled on Monday that Qualcomm lost its right to enforce two of the patents because of "litigation misconduct and concealment" during the case in which the company allegedly held back relevant information from the jury.

'Deadly determination'

Qualcomm was an early developer of CDMA, the digital wireless technology that has become the backbone of many wireless networks across the world.

As the wireless industry moves to upgrade to next-generation, or 3G, networks, many players in the sector -- including Nokia
NOK, +0.66%
L.M. Ericsson
ERIC, +2.26%
and Texas Instruments
TXN, -0.59%
-- have disputed Qualcomm's hold on a broad base of the patents covering the technology, accusing the company of trying to monopolize the intellectual property that underlies the fast-growing business.

The ruling Monday from U.S. Federal Judge Rudi Brewster seemed to bolster that view.

"In light of all of the above evidence finally revealed, the eventual collapse of Qualcomm's concealment efforts exposes the carefully orchestrated plan and the deadly determination of Qualcomm to achieve its goal of holding hostage the entire industry," Brewster wrote in the ruling.

As a result, Qualcomm was ordered to pay Broadcom's attorney's fees. Broacom also filed a motion seeking sanctions, which the judge has not yet ruled on.

Losing the veto

Qualcomm lost on another front on Monday. The Bush administration declined to veto a ruling from the International Trade Commission that may keep many of the wireless phones sporting Qualcomm's chipsets from the U.S. market.

The ITC had issued an injunction against Qualcomm in early June, after finding that Qualcomm's chips infringed on patents held by Broadcom. See previous story.

Few expected that Qualcomm would win a veto of the ITC ruling. Damage to the company may be mitigated by the fact that Verizon Wireless, one of the country's largest wireless carriers, has already entered into a licensing deal with Broadcom.

In addition, Qualcomm said it is working on testing a work-around to the technology in question, saying acceptance of the solution among its customers was "strong."

"The Verizon decision, widely considered to have been a negative read on Qualcomm's bargaining leverage at the time, now looks to have helped Qualcomm in the appeals process by establishing that Broadcom can be remunerated for its patents and would not be irreparably harmed if Qualcomm continues to ship," wrote Cowen & Co. analyst Matthew Hoffman, who rates Qualcomm as outperform.

Lawrence Harris of Oppenheimer & Co. said in a report Tuesday that he's becoming more confident that Qualcomm will be able to settle its legal issues.

"We believe that Qualcomm's highly liquid balance sheet will prove attractive to many investors in the current market environment," wrote Harris, who maintained an outperform rating and $51 price target on the stock.

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